Sunday, April 10, 2005

The Tipping Game

Few people aspire to pay more than is strictly necessary for goods and services, yet in tipping they do so, often quite voluntarily. So, what accounts for this largesse?

I think this question is easy to answer: tips are expected and people generally do what they are expected to do. It is traditional for people to give a tip to the waiter/waitress after the meal. Since we all know this is case, we would feel bad about not doing what we are expected to do.

I think tipping is a simple example of the problem with non-cooperative game theory. Non-cooperative game theory might do well enough to explain the behavior of firms because firms are so motivated by profits that they are not motivated by what others expect them to do. But individuals would rarely behave in the manner that non-cooperative game theory would suggest is rational behavior, because individual are programmed instinctually to cooperate. We tend to do what we are expected to do.

The tipping game is like a two-stage prisoners’ dilemma game. First the server either cooperates (good service) or not-cooperates (poor service). The customer observes the service and then either cooperates (gives a tip) or not-cooperates (gives no tip). Both would be better off cooperating than both not cooperating but the customer would have more money in his pocket if he doesn’t tip even when he receives good service. But people are hard-wired not to behave that way.

I think the prisoners’ dilemma game came up frequently in humanity’s early history. Warfare is classic example. The day that my tribe goes to war with the neighboring tribe might be a good day to have a severe stomach ailment. But a tribe where most people think that way risked losing to the other tribe and being wiped out. People evolved an instinct for cooperating in situations that are similar in nature to the prisoners’ dilemma. Today we vote in elections even though we know that our vote isn’t likely to make any difference. But instinctively, we know that we should not think about it that way. People will stand in lines for hours to cast a ballot. Economists wonder why we would bother. I don’t understand why some people don’t vote when it is so easy to do and people expect you to do it. Maybe they had bad parents or they have become bad people themselves.

In general, I hate tipping in situations where I do not know what is expected. It really bothers me. I know what is expected at the restaurant. But what does the porter expect? (15% of what?). I will walk a mile dragging a 100-pound load behind me to avoid such a situation. I just don’t like having something expected of me and not knowing what it is.

One may argue it's not expectations but reputation that drives cooperation. In the war example it's pretty obvious the stomach acher is labelled a coward. We are social species and gossip is our number one topic of discussion. Combine the two and u see that those that cooperate can survive with in the group.